Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q1 2014 Earnings Presentation
26 slides from Two Harbors Investment's earnings presentation, May 7, 2014
Slide 1: First Quarter 2014 Earnings Call
May 8 , 2014 First Quarter 2014 Earnings Call
Slide 2: Safe Harbor Statement
Safe Harbor Statement F O R W A R D - L O O K I N G S T A T E M EN T S This presentation includes “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Actual results may differ from expectations, estimate
Slide 3: Executive Summary
Executive Summary FIRST QUARTER 2014 RESULTS – STRONG RETURN ON BOOK VALUE • Reported book value of $10.71 per share; total return on book value 3.9%(1) — Q1-2014 cash dividend of $0.26 per share • Delivered Comprehensive Income of $152.6 million — Return on average equity of 15.7%, or $0.42 per sha
Slide 4: Macroeconomic & Policy Considerations
Macroeconomic & Policy Considerations MACROECONOMIC CONSIDERATIONS • Unemployment recovery • Home price appreciation continues POLICY CONSIDERAT IONS: • Federal Reserve’s Quantitative Easing (QE) plan • GSE Reform: – Johnson-Crapo Bill – HOME Forward Act – PATH Act – Corker-Warner Bill • Final Quali
Slide 5: Book Value
Book Value 5 Q4-2013 Book Value ($M) Q4-2013 Book Value per share Q1-2014 Book Value ($M) Q1-2014 Book Value per share Beginning Stockholders’ equity – basic $3,773.1 $10.36 $3,855.0 $10.56 GAAP Net Income: Core Earnings, net of tax 76.4 88.2 Realized gains and (losses), net of tax 86.3 (38.6) Unrea
Slide 6: Financial Summary
E X P E N S E R AT I O Financial Summary 6 Q 1 - 2 014 F I N A NC IAL H I G H L I G H TS C O R E E A R N I NGS (1 ) Q 1 - 2 014 AC C O U NT ING M AT T E R S (1) See footnote 2 on slide 3 for the Core Earnings definition. For a reconciliation of GAAP to non-GAAP financials, please refer to the GAAP t
Slide 7: Financing Profile
Financing Profile(1) 7 FEDERAL HOME LOAN BANK OF DES MOINES • Outstanding secured advances of $464.5 million — Pledged collateral primarily Agency securities — Over time expect to utilize FHLB financing for mortgage loans — Average maturity of approximately 2.8 years and borrowing rate of 0.4% • Tot
Slide 8: Portfolio Performance Summary
Portfolio Performance Summary 8 Q 1 - 2 014 P E R FO R M A NC E H I G H L I G H T S Q 1 - 2 014 N E T I N T E R E ST Y I E L D A N N UAL I ZE D Y I E L D S BY R M BS P O RT FO L I O (4 ) (1) See Appendix page 14 for calculation of first quarter return on book value. (2) Assets in “Rates” include Age
Slide 9: Targeted Capital Allocation
TA RG ET E D C A P I TAL A L LO C AT I O N Q 1 - 2 014 H I G H L I G H T S P O RT FO L I O C O M P O S I T I O N Portfolio Composition 9 • 58% capital allocation to Rates(4) — MSR capital allocation of 13%; expect allocation to increase over time — Focused on higher coupon, shorter duration assets •
Slide 10: Key Portfolio Metrics
BV E X P O S U R E TO + 100BP S C H A N G E I N R AT E S (2 ) Q 1 - 2 014 H E D G I N G ST R AT E GY Q 1 - 2 014 P O RT FO L I O M E T R I C S Key Portfolio Metrics 10 • Low implied debt-to-equity(1) ratio of 2.7x versus 3.1x at December 31, 2013 • Prepays lower; seasonally slow period Portfolio Met
Slide 11: Mortgage Servicing Rights
Mortgage Servicing Rights Q1-2014 REVIEW • Added $121 million in UPB from PHH pursuant to flow purchase arrangement ― Production from late 2013 • Completed $5.0 billion UPB bulk purchase in April 2014 ― Underlying pool of mortgages are Fannie Mae loans; primarily new production ― Purchase price of a
Slide 12: Mortgage Loan Conduit and Securitization
Mortgage Loan Conduit and Securitization PRIME JUMBO INITIATIVE EXPANDING • Prime Jumbo holdings of $141 million at March 31, 2014 – Pipeline (i.e. interest rate locks) of approximately $154 million; was $12 million at December 31, 2013 • Potential to securitize if market conditions warrant • Focus
Slide 13: Appendix
Appendix
Slide 14: Return on Book Value
Return on Book Value 14 Return on book value Q1-2014 (Per diluted share amounts, except for percentage) Book value at March 31, 2014 $10.71 Book value at December 31, 2013 10.56 Increase in book value 0.15 Dividend declared in Q1-2014 0.26 Return on book value Q1-2014 $0.41 Return on book value Q1-2
Slide 15: Financial Performance
D I V I D E NDS (3 ) Financial Performance 15 C O M P R E H E N S I V E I N C O M E ( LO S S ) BO O K VA LU E A N D D I V I DE ND P E R S H A R E (1 ) G A A P N E T I N C O M E ( LO S S ) (1) Diluted shares outstanding at end of period, which includes the effect of dilutive outstanding warrants dete
Slide 16: Operating Performance
Operating Performance 16 (In millions, except for per share data) Core Earnings Realized Gains Unrealized MTM Q4-2013 Financials Core Earnings Realized Gains Unrealized MTM Q1-2014 Financials Interest income $137.4 $ - $ - $137.4 $138.5 $ - $ - $138.5 Interest expense 26.9 - - 26.9 26.0 - - 26.0 Net
Slide 17: GAAP to Core Earnings Reconciliation
GAAP to Core Earnings Reconciliation 17 (In thousands, except for per share data) Three Months Ended December 31, 2013 Three Months Ended March 31, 2014 Reconciliation of GAAP to non-GAAP Information Core Earnings: Net income (loss) attributable to common stockholders $239,414 $(29,145) Adjustments
Slide 18: Rates: Agency RMBS Metrics
Rates: Agency RMBS Metrics 18 AGENCY RMBS CPR(5) AGENCY PORTFOLIO YIELDS AND METRICS (1) Agency yield includes impact of Agency Derivatives. Interest income on Agency Derivatives was $7.0 million and $5.8 million for the first quarter of 2014 and fourth quarter of 2013, respectively. (2) Cost of fin
Slide 19: Rates: Agency RMBS
Rates: Agency RMBS 19 As of March 31, 2014 Par Value (M) Market Value (M) % of Agency Portfolio Amortized Cost Basis (M) Weighted Average Coupon Weighted Average Age (Months) 30-Year Fixed 4.0-4.5% 4,877 5,149 51.3% 5,286 4.2% 18 ≥ 5.0% 801 889 8.9% 869 5.5% 63 $5,678 $6,038 60.2% $6,155 4.4% 24 15-
Slide 20: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights 20 As of Dec. 31, 2013 As of Mar. 31, 2014 Fair Value ($M) $514.4 $476.7 Unpaid Principal Balance ($M) $42,324.3 $41,596.3 Weighted Average Coupon 3.9% 3.9% Original FICO Score 734 738 Original LTV 76% 75% 60+ Day Delinquencies 0.9% 1.0% Net Servicing Spread 25 basis
Slide 21: Credit: Non-Agency RMBS Metrics
Credit: Non-Agency RMBS Metrics 21 NON-AGENCY PORTFOLIO COMPOSITION NON-AGENCY PORTFOLIO YIELDS AND METRICS (1) Cost of financing non-Agency RMBS includes interest spread expense associated with the portfolio’s interest rate swaps of $2.0 million and $1.9 million for the first quarter of 2014 and fo
Slide 22: Credit: Non-Agency RMBS
Credit: Non-Agency RMBS 22 As of March 31, 2014 Senior Bonds Mezzanine Bonds Total P&I Portfolio Characteristics Carrying Value ($M) $2,328 $474 $2,802 % of Credit Portfolio 83.1% 16.9% 100.0% Average Purchase Price(1) $52.06 $59.20 $53.27 Average Coupon 2.3% 1.7% 2.2% Weighted Average Market Price(
Slide 23: Financing
Financing(1) 23 (1) As of March 31, 2014. (2) Does not include repurchase agreements collateralized by U.S. Treasuries of $1.0 billion and mortgage loans held-for-sale of $96.2 million. (3) Excludes purchase of FHLB membership and activity stock totaling $18.6 million as of March 31, 2014 Collateral
Slide 24: Interest Rate Swaps Hedging Strategy
I N T E R E ST R AT E SWA P S (2 ) Hedging Strategy(1) 24 (1) As of March 31, 2014. (2) Notional amounts do not include $1.0 billion of notional interest rate swaps economically hedging our trading securities, $3.4 billion of notional interest rate swaps hedging our available-for-sale securities, an
Slide 25: Interest Rate Swaptions Hedging Strategy
I N T E R E ST R AT E SWA P T I O NS Hedging Strategy(1) 25 (1) As of March 31, 2014. Option Underlying Swap Swaption Expiration Cost ($M) Fair Value ($M) Average Months to Expiration Notional Amount ($M) Average Pay Rate Average Receive Rate Average Term (Years) Purchase Contracts: Payer < 6 Months
Slide 26: Two Harbors Investment Corp.
TWO HARBORS Investment Corp.
Two Harbors Investment — Q1 2014 Earnings Presentation on 6ix